For the renewable energy industry, site selection optimization goes well beyond incentives.

Robert Kittell, P.E., Senior Managing Director, Newmark Knight Frank

March 2011

(page 3 of 3)Solar Manufacturing
Across the country, solar developers are signing 20- to 30-year power purchase agreements (PPAs) with local utilities for multiple-megawatt solar power plants. Along with tax incentives, economic development professionals often structure arrangements for manufacturing facilities to initially sell solar panels to these proposed utility-scale projects. It remains to be seen if there will be new demand to sustain these photovoltaic (PV) module plants after initial orders are filled. A mature industry will likely include consolidation and closures, so investors and developers face a number of potential industry outcomes.

The U.S. solar industry faces challenges similar to the wind industry: A market size driven primarily by policy, an uncertain political and economic climate, and generation costs many times higher than traditional gas and coal-fired plants. Subsidies, feed-in tariffs, and mandates are all subject to shifting political winds, while commoditization, cutthroat competition, procurement risk, and over-supply cycles loom large. Despite this uncertainty, most forecasts are still projecting robust growth for the U.S. solar industry. Congress showed bipartisan support by recently passing a one-year extension of the Section 1603 Treasury Grant Program for solar projects.

Even for the grid-tied market, policy and local economics dwarf even the most fundamental element of the solar power generation equation - insolation, the sun's ability to provide power - in driving PV manufacturing demand. Add to this the massive capitalization requirements, the need for a skilled labor force, complex operational and supply chain challenges, potential acquisitions or consolidations, along with risk mitigation, reversibility, and global factors, the real estate portfolio optimization equation begs for a comprehensive approach with a structured decision-making methodology.

Ask Area Development

Are you planning to relocate a solar or wind manufacturing facility? Submit your business questions below to Ask Area Development and the article authors will respond.

An unsophisticated approach may boil down to a PV manufacturer with tremendous growth opportunities, but with simultaneous capitalization constraints and top line growth demands from investors. The easy answer would be to go where the incentives are. Though this approach may lead to short-term viability, ignoring the economic geography may lead to a high-profile collapse of the enterprise.
In California and Massachusetts, some of yesterday's alternative energy success stories have become today's uncomfortable headlines: plant closings, millions of lost taxpayer dollars, and hundreds of disenfranchised workers. The end result? The inevitable acquisition of a project pipeline by a well-positioned competitor or the offshoring of a manufacturing operation, depriving a community of its quest for a greener economy.

Improved productivity, supply chain initiatives and leveraging scale are driving down solar's per-watt costs dramatically. Manufacturers who embrace applied economic geography will place themselves at a competitive advantage and are setting the foundation to become the long-term industry success stories.

Leveraging Geography for Competitive Advantage
After spending three years studying and advising in this realm, we believe that much of the alternative energy industry is struggling with the concept of "where to locate," and that it ties back to the underlying principles of "knowing thyself." An enterprise must be able to identify and acknowledge its true differentiators, core short-term and long-term markets (non-policy driven), core values, operating baseline, five-year plan, and critical needs of the business before it seeks to optimize business geography initiatives.

Newmark Knight Frank strongly believes when we advise manufacturing companies that this is about a total cost equation and, where possible, a total quantification of all qualitative factors that contribute to a location decision. We integrate labor, operations, logistics, regional differentiators, risk, and soft factors - then filter against data sets, both desktop and empirical (substantiated by ground truth) to indicate geographic plausibility. Addressing incentives and economic development opportunities is crucial no doubt to these capital driven and cash starved assets in the alternative energy sector. However, once these federal and local incentives go away, it will be back to basics:
• competitive structural costs
• the ability to innovate and respond to market forces with the right mix of physical, human and political capital
• a reasonably optimal position within a domestic or global supply chain - and flexibility to respond to the rapidly changing supply chain landscape of alternative energy
• a business climate and local partners in the state/community who want your industry and operations to be successful, profitable, and sustainable.

The mission critical outcome must be an enterprise built upon solid financials and human factors that are rooted in compatible economic geography - for the long term. Short-term opportunistic variables must be acknowledged (an available building that allows for quick start-up, a recent customer order requiring proximity, a private equity investor who has other operations that they want to be included in the search), but in the end it will be about whether the business process matches the geography.

The wind and solar industries face a confluence of market factors that includes huge potential, high risk, formidable competition, vast government support, and staggering capitalization requirements. These drivers have created a business dynamic with potential outcomes ranging from "fantastic failure" to "moonshot." The manufacturers that focus on matching geography to enterprise needs will position themselves best to achieve operational excellence and economic sustainability

Robert Kittell, P.E., Senior Managing Director, Newmark Knight Frank

Since 1995, Robert Kittell, P.E., has delivered several major initiatives as consultant and program manager in Environmental Stewardship and Real Estate Portfolio Optimization, including pollution prevention, electronics recycling, EVs and charging infrastructure, and re-utilization programs. He is a leading expert in the areas of Sustainable Economics, Demand Analysis and Risk Management.

Bob Hess leads the Consulting Group at Newmark Grubb Knight Frank Global Corporate Services and is responsible for strategy development, quality assurance, and leading business development activities on a global basis. Prior to joining Newmark Grubb Knight Frank, Hess was a Leading Partner in Cushman & Wakefield’s Global Business Consulting Group based in Chicago and Founder of the firm’s Global Supply Chain Solutions consulting practice.
Other past experience includes his role as a Lead Partner with Deloitte & Touche for 18 years in their Fantus Locations Strategies service line, a specialty consulting practice known for industry leading strategic facility planning, location strategy, site selection, and corporate real estate advisory services.
Aside from his supply chain planning and facility location strategy core competencies, other strategy and operations experience includes distribution network optimization, manufacturing rationalization and consolidation, relocation feasibility, strategic cost reduction, large capital investment program management, commercial and industrial site evaluation and due diligence methods, detailed labor market/workforce analysis, and complex financial incentive negotiations.
Hess earned his BA in Economic Geography/Urban and Regional Planning, cum laude, from the University of Minnesota - Duluth, and an MBA in Marketing Management from DePaul University in Chicago. He attended Northwestern University in Chicago completing Executive Development Programs in Global Supply Chain Management and Factory Physics/Lean Manufacturing, and recently attended MIT for Creative Problem Solving/System Dynamics.